Thursday, January 19, 2017

How The ‘Trump Rally’ Stacks Up To Other Post-Election Stock Market Gains

The stock-market rally that accelerated in the wake of Donald Trump’s November election victory lost some steam last month, but the S&P 500 remained on track Thursday to log its biggest election-to-inauguration gain since Bill Clinton won a second term in 1996.

Trump will take the oath of office on the Capitol steps at midday Friday. The near-term question for investors is whether stocks will maintain their upside bias or succumb to a “sell-the-news” type correction.

The S&P SPX, +0.18% is up 6.19% since Election Day on Nov. 8. That would be the largest rise since the index’s 8.8% run following Clinton’s re-election victory, according to Dow Jones data. It would be the fifth-largest such rally for the index or its predecessors since Herbert Hoover’s 1928 win (see chart below):

The inauguration itself might not provide a definitive answer as investors await more details of Trump’s policy agenda.

The post-election rally has seen stocks “run out ahead” of earnings expectations, wrote Nicholas Colas, chief market strategist at Convergex, a New York-based global brokerage firm, in a Wednesday note. He observed that Wall Street analysts have yet to alter their forecasts as they wait for specifics on Trump’s proposals and how Congress responds before changing their financial models.

Collectively, Wall Street’s finest are sticking to a $133-a-share earnings forecast for the S&P 500 in 2017, little changed from where they were in October, he noted. Earnings forecasts for the first quarter, meanwhile, have been trimmed despite a boost to consumer confidence.

Of course, if investors believe in future revenue and earnings growth, “they are happy to run out ahead of the Street,” Colas said. But with a valuation at a lofty 17 times earnings, U.S. stocks already discount some earnings improvement, most of which was expected no matter which candidate won the election, he said.

The bright spot, Colas said, is that none of what Trump has promised or proposed is yet factored into any Wall Street numbers. “As those measures come into tangible existence, equities should respond,” he said.

Meanwhile, the election-to-inauguration performance offers little for investors to hang their hats on. Much of it could very well be down to timing.

After all, as previously noted by MarketWatch, Hoover is the all-time champ when it comes to post-election rallies, topping the table with a 13.3% run between Election Day and his March 4, 1929, oath (inauguration was moved to Jan. 20 by the 20th amendment in 1933). A little under eight months later, the market suffered the Crash of 1929, a signpost for the start of the Great Depression.

Obama’s first election victory came during the darkest days of the financial crisis. Stocks bottomed less than two months after his inauguration, marking the beginning of one of the longest bull markets in history.

So what about that “buy the rumor, sell the news” market axiom? A look at data going back to 1953 by LPL Financial shows the S&P tends to strengthen in the two weeks after the inauguration, rising 77.8% of the time and posting a median return of 1.2%. In the month after the oath, however, stocks have seen a median return of negative 0.8%, rising just 44.4% of the time. The performance following the swearing-in of a Republican president has tended to be weaker.

Skeptics argue that growing anticipation for a post-inaugural selloff is a contrarian indicator that could serve to inoculate the market against near-term weakness.